WAG

Walgreen Co. (WAG)

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Industry: Health Care
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Walgreen (WAG)

Q3 2011 Earnings Call

June 21, 2011 8:30 am ET

Executives

Kermit Crawford - President of Pharmacy Services

Wade Miquelon - Chief Financial Officer and Executive Vice President

Rick Hans - Divisional Vice President of Investor Relations & Finance and Assistant Treasurer

Gregory Wasson - Chief Executive Officer, President and Director

Analysts

Edward Kelly - Crédit Suisse AG

Mark Miller - William Blair & Company L.L.C.

David Magee - SunTrust Robinson Humphrey, Inc.

Jonathan Baucom - Goldman Sachs Group Inc.

Lisa Gill - JP Morgan Chase & Co

John Heinbockel - Guggenheim Securities, LLC

Meredith Adler - Barclays Capital

Eric Bosshard - Cleveland Research Company

Steven Valiquette - UBS Investment Bank

Robert Willoughby

Thomas Gallucci - Lazard Capital Markets LLC

Mark Wiltamuth - Morgan Stanley

Deborah Weinswig - Citigroup Inc

Andrew Wolf - BB&T Capital Markets

Presentation

Operator

Good day, ladies and gentlemen. Welcome to this Walgreen Company Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn things over to Mr. Rick Hans. Please go ahead.

Rick Hans

Thank you, and good morning, everyone. Welcome to our third quarter conference call. Today, Greg Wasson, our President and CEO, and Wade Miquelon, Executive Vice President and Chief Financial Officer, will discuss the quarter and the additional announcement this morning regarding Express Scripts. Also joining us on the call and available for questions is Kermit Crawford, our President of Pharmacy, Health & Wellness Services and Solutions; and Mark Wagner, President of Community Management. When we get to your questions, please limit yourself to one.

As a reminder, today's presentation includes certain non-GAAP financial measures, and I would direct you to our website at investor.walgreens.com for reconciliations. Also, I'm available throughout the day by phone to answer additional questions.

You can find a link to our webcast under Investor Relations website. After the call, the presentation and the podcast will be available in archives on our website for 12 months.

Certain statements and projections of future results made in this presentation constitute forward-looking information that is based on current market, competitive and regulatory expectations that involve risk and uncertainty. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K and 10-Q filings for a discussion of risk factors as they relate to forward-looking statements.

Now I'll turn the call over to Greg.

Gregory Wasson

Thank you, Rick, and good morning, everyone. And thank you for joining us on our call. I'll give you an abbreviated review of our strong third quarter financial results and then Wade will take you through the details of our performance. And finally, we'll spend more time on our announcement this morning regarding the PBM Express Scripts.

Starting with our results today, we had a very solid quarter, which demonstrates that our strategies are generating strong financial results. We reported record third quarter sales of $18.4 billion, up 6.8% from $17.2 billion a year ago. Net earnings for the quarter were up 30.3% to a record $603 million compared to $463 million a year ago. Third quarter earnings per diluted share were $0.65, an increase of 38.3% versus last year's $0.47 per diluted share, marking our fourth consecutive quarter of double-digit earnings per share growth.

Strong cash flow trends continued in the quarter with cash flow from operations of $1.2 billion and free cash flow of $1 billion. In the quarter, we grew our gross profit by 8.5% and our SG&A by 7.2%. Our performance this quarter was a result of our ability to grow gross profit dollars faster than SG&A dollars, allowing us to deliver on our goal of double-digit earnings per share growth.

This quarter, gross profit dollar growth was $122 million above SG&A dollar growth, yielding an EBIT growth of 14.8%. Driving our gross profit dollar growth, we saw solid performance across a number of categories including retail pharmacy, over-the-counter medications, beauty and personal care. While we continue to grow our business and invest in the future, our strategies are implemented against a backdrop of economic and regulatory uncertainties.

Persistent high unemployment, a weak housing market, high fuel prices and inflation all put pressure on consumers. In response, we believe our customers are managing their overall spending by buying more ad and private brand items, as well as continue to see mix shift to consumables and nondiscretionary items.

Regarding inflation, we constantly monitor the competition and believe we are achieving the right balance between margin and traffic in our front-end comp. In addition, we continue to experience both commercial and governmental reimbursement pressure. On the government side of the issue, it's too early to speculate on the eventual timing and impact of AMP.

And on the regulatory front, we are pleased that the Senate took action on debit card reform. While the substance of the Durbin Amendment to the Dodd-Frank financial reform bill is clear, both the timing and financial implications are still unknown, and it's premature to speculate on any impact to our business. As we respond to a changing business climate, we also focus on solid execution to generate results. Throughout this quarter, we continued with our Customer Centric Retailing conversions, and in early June, reached a milestone of 4,000 CCR stores. We're on track to achieve our goal of 5,500 stores transitioned to CCR by the end of October this calendar year.

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